April 6 (Bloomberg) -- Four months after its founder and
chief executive officer passed away, Cephalon Inc. is battling a
$5.7 billion hostile bid from Valeant Pharmaceuticals
International Inc., saying the offer is too low.

Cephalon rejected Valeant’s $73-a-share cash bid yesterday,
saying it is “opportunistic” and undervalues the company’s
marketed and experimental medicines. At that price, the deal
would be the cheapest of any drug company takeover of more than
$1 billion, according to data compiled by Bloomberg.

Cephalon is probably searching for other buyers, though
most potential acquirers have likely evaluated the company
already, said Eric Schmidt, an analyst with Cowen & Co. in New
York. Schmidt doesn’t expect another bidder to emerge since
“Cephalon has had a target on its back since Frank Baldino
passed away,” he said, referring to the founder in an e-mail
yesterday. Valeant may need to raise its price to $75 to $80 a
share before there’s a deal, he said.

“It will take a couple months,” Schmidt said. “There
will be a dance and courtship and there will be a deal at the
end of that process.”

Cephalon, based in Frazer, Pennsylvania, fell 35 cents to
$77.02 at 4:30 p.m. New York time in Nasdaq Stock Market
trading. The shares had lost 19 percent in the 12 months before
the Valeant made its bid. Valeant, whose shares more than
doubled in that period, dropped $1.59, or 3 percent, to $52.37
on the New York Stock Exchange.

Approaches Rejected

Valeant, based in Mississauga, Ontario, made its offer
public March 29, after Cephalon rejected private approaches. The
company said it intends to move swiftly and yesterday named a
slate of seven directors it is proposing to replace Cephalon’s
board. Cephalon set a record date of April 8 by when
shareholders must own stock to be able to vote on Valeant’s
proposal.

“We continue to strongly believe that it is in the best
interests of both Valeant’s and Cephalon’s stockholders to
resolve this matter quickly, one way or the other,” Valeant CEO
J. Michael Pearson said in a statement yesterday. “Valeant will
move fast. We had hoped that Cephalon would do the same. Now, it
will be in the stockholders’ hands.”

Cephalon reported 2010 revenue of $2.81 billion. The
company sells the narcolepsy treatment Provigil, which last year
generated sales of $1.12 billion. The medicine faces a loss of
patent protection in April 2012. Cephalon is also in late-stage
studies on medicines for lupus and pain, it says on its website.

Natalie de Vane, a spokeswoman for Cephalon, yesterday said
the company declined to comment further.

Valeant’s $73-a-share proposal values Cephalon at 5.3 times
earnings before interest, taxes, depreciation and amortization.
The deal would still be the cheapest in history even if Valeant
raised it to $84, Bloomberg data show. That price would be less
than the 6.1 times Ebitda that Little Chalfont, England-based
Amersham Plc agreed to pay for Nycomed ASA in July 1997 --
currently the cheapest drug takeover on record, the data show.

Valeant plans to fund the deal with debt and anticipates
using cash generated by Provigil and the potential sale of
Cephalon assets in western Europe to pay it down, Pearson said
at the time it announced the offer.

$6.7 Billion in Debt

To complete the takeover, Valeant will need to raise $6.7
billion in debt, he said. The company had $400.4 million in cash
and equivalents versus $3.6 billion in total debt at the end of
2010, data compiled by Bloomberg show.

The company has “received positive feedback from many of
the largest stockholders” and is “ready to quickly commence
and close our transaction,” Pearson said in yesterday’s
statement. He said last week the offer is “very fair,” and
that he wouldn’t get into a bidding contest.

If Valeant is successful, the acquisition would be the
largest hostile takeover in the industry since Sanofi-Aventis SA
bid for Genzyme Corp. last year. The French drugmaker offered
$18.5 billion in August for the Cambridge, Massachusetts-based
biotechnology company before raising its bid to $20.1 billion to
secure a deal in February.

Cephalon was founded in 1987 by Baldino, a biotechnology
pioneer who died in December of leukemia. When Baldino acquired
Provigil in 1993, analysts estimated it would generate no more
than $50 million in annual revenue. In 2009, the drug became a
blockbuster, surpassing $1 billion in sales.

“When you lose your CEO, it’s common business knowledge
that you’re probably more susceptible to a takeover like this,”
Cowen’s Schmidt said in a telephone interview last week.
“Especially when you have a CEO like Frank.”